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hello everyone and welcome to our december 2020 bank council roundtable uh today we're going to talk about pre-packaged bankruptcies um my fellow panelists are all partners in the finance and restructuring group joe acosta is a partner in our dallas office eric schnabel is a partner in our delaware and new york office alpha says and peter nelson's a partner in our minneapolis office um eric take it away thanks tom uh so just a few preliminary uh issues we're gonna be here for an hour uh if you need any of the materials or so forth uh you know feel free to email the events the uh email in terms of questions feel free to uh email questions or use the chat feature to give us questions and we're happy to have those in the middle of the presentation no need to wait to the end uh we are going to have a q a at the end if we've got time uh if we don't get to your question or you think about it later you know feel free to contact any of us or any of your dorsi uh uh uh counterpoints uh to to grab us or grab whoever and ask away so thanks very much for being here we hope to do this again real soon live at some point hopefully next year um and hopefully my neighbor's dog won't bark during the presentation uh which has happened before but anyway so this is us uh a big uh thank you to our associate uh karina who helped prepare these materials for us and you know let's just get right to it so we basically have um four substantive sections and a q a uh here we're going to go through the types of restructurings and these are really balance sheet plan restructurings we're not getting into sales or those other aspects that that occur in bankruptcies and distressed situations we're talking about the timelines a little bit compared to a normal case versus a pre-pack uh we're gonna get to some nuts and bolts of pre-packs and then we're gonna talk a little bit about uh some case studies some cases that we're aware of or involved in and and how that played out uh given the substance and then we'll have time for questions if you have any so getting right to the um types of restructuring so what we've laid out here is kind of the four different groups that you have in in a balance sheet type restructuring you've got your out of court workouts uh which you know you're in the dark a little bit about what's going on from a public perspective all the way to the free fall or traditional bankruptcy uh where there's nothing pre-arranged or pre-negotiated or pre-packaged and you just file for some reason and you figure out you know where to go from there and we're going to talk about each one of these four individually so moving to the first category which is uh out of court uh workouts you know this is a situation in which you've got a balance sheet restructuring and typically um you can do this without the the help of the bankruptcy court if you really have key creditors involved and on board uh and you can do this through some sort of an exchange offer or uh you know recapitalization or refinancing uh some debt equity swap or a swap of one debt into a different kind of debt or convertible or or something like that ucc foreclosures or even sales are ways that a distressed company can do an out of court workout these are really great why because they achieve the restructuring objective of you know changing the capital structure of the company the balance sheet but you're doing a very efficient way because any time you can avoid court it's going to be less expensive and and oftentimes quicker uh so that's that's the you know our first the first type of restructuring moving on to the pre-package which is what we're going to talk about more substantively today the pre-pack that is where you utilize the bankruptcy process but you do the entire solicitation plan voting everything pre-petition and then you just show up in the bankruptcy court with all that completed and you go right into the confirmation process uh and this is a scenario that the debtor in essence the bankruptcy case can be quite quick you know we've all heard stories or seen cases have been involved in cases where you know the bankruptcy goes on for years uh while these cases these pre-packaged cases can go from one to 45 days and we'll talk about um the uh the timeline a little bit later but even the prepackaged part which goes pre-petition has to comply with all the bankruptcy timelines so even though you're not in bankruptcy you still need to comply with those kind of bankruptcy rules so that when you show up in court uh you're in full compliance so that's that's what a true pre-pack is now when you look at the next uh type of restructuring we call prenup and pre-negotiated sometimes people call this a pre-pack because in this scenario you didn't do a full solicitation like a true pre-pack uh you didn't file you know disseminate the plan and disclosure statement to your creditors have a voting deadline outside of bankruptcy and have the votes all you know all cast and ready to go before you file here it's more of you have a pre-negotiated agreement and then you do that solicitation uh your plan filing so forth post petition after you filed bankruptcy one of the key components of a pre-negotiated deal is that the borrower or the debtor to be is going to have uh the major constituencies of creditors um you know in an agreement and enter into a restructuring support agreement and the rsa is a key component because it gives you know it's the the elements of the deal it could be a term sheet in terms of the um recapitalization balance sheet restructuring or it could be you know plans a full uh uh drafted plan attached to exhibit a to the rsa but it so we'll set forth those those uh timetables it'll commit the supporting creditors to vote in favor of the plan once it happens it'll commit the debtor to move that plan forward through the bankruptcy usually always or should have a fiduciary out for the debtor um but but the the difference between the pre pre-pack pure pre-prac and the pre-negotiated is here you just have the business deal you're really doing the um the the pure bankruptcy stuff in the bankruptcy case and that will stretch out as we'll discuss a little later the timetable uh for this because you have more to do in the bankruptcy case as opposed to the uh pure prepack and then finally the last uh before you move on um you want to talk a little bit about the fiduciary out what that means sure so you know a debtor uh is a fiduciary to the stakeholders and when you're insolvent those stakeholders enlarge if you will the group to include its creditors and so the debtor has to have an out from the business deal of the um planned support agreement the restructuring support agreement in case an a better deal comes along so for example if there was going to be a you know a debt equity swap which would allow the debt right to gain that equity into the new um reorganized company and they filed bankruptcy and then and then you know facebook or some monstrosity apple with more money than anyone shows up warren before buffett what have you and says look i'm going to write a check for money that will take out the the debt and and and give some money to maybe the unsecured creditors or to equity the debtor has to have that ability to get out of the restructuring support agreement and take that deal because it's better for the enterprise as a whole even though the the lenders who signed the restructuring support agreement might not want that because they might want the equity upside that that the rsa has so that fiduciary out is typically required by the courts the rsa is going to be approved typically assumed in the bankruptcy case by the court and the court is going to want to know that the debtor can pivot and turn somewhere else if if another deal um a better deal occurs and if you think about plans the debtor files a plan it can always pull the plan and do something different if a better deal returns because it's its plan like it has its own fiduciary out when it's when it's proposing a plan and that's why these restructuring support agreements have to give the debtor that same fiduciary out as it has if it was you know proposing its own deal uh to creditors it was a long-winded answer but uh no i i appreciate eric i think that's an important aspect of these matters and and uh i wanted to make sure everybody heard what it was about well it's something interesting to think about to tom because you know as a as a on the creditor side uh you know which is why speed sometimes is something what you want if you do really feel like this is a good deal for you to to get some equity in a debt equity swap for example uh you want to move quickly because the longer things take the more likely an alternative comes up and it might not be better but then there might be a fight about whether it's better and that can be costly and disrupt the strategy uh you want to do so the final category that we have of uh uh restructurings are kind of what we the traditional or the free fall where the debtor really doesn't have a reorganization plan or might have some ideas but it hasn't really negotiated to a large extent and it has to file bankruptcy it needs the automatic stay because of some kind of liquidity event uh you know liquidity crisis or some some other sort of uh you know we've called it a liability crisis which be cases like the asbestos cases or the abuse cases in the archdiocese or the boy scouts you know where they really need they need bankruptcy to help you know fix those liability issues uh you know those are cases who file who maybe there have been some negotiations that occurred but broke down uh or they really haven't negotiated because the creditors are too widespread and they really can't bring people to the table without the public uh um process of the bankruptcy court and these things can obviously uh you know on the quick end um you know are gonna be longer you know four months five months uh but they can be you know years uh potentially uh and again we're excluding kind of the sales scenarios uh because these sale cases are kind of uh its own unique uh animal we're talking here plan type cases so that's the free fall free fall traditional type of restructuring so let's talk a little bit more uh um specifics about when a pre-pack will make sense as opposed to these other three different categories that we talked about so why does it make sense well one a pre-pack you know utilizes the bankruptcy process which is different than out of court so you can drag people along into it even if they're not on board and it's it's them of those court proceedings it's going to be the shortest and most effective uh cost effective uh process you know it's going to give you a certainty of outcome in the bankruptcy case because you pretty much know that you're you've got the votes and you've got the support of your creditors and that you know barring some issue on feasibility or a value fight by some dissenting creditor you're probably going to you know be okay in front of the court and it could get higher because a higher probability of a positive outcome uh on day one of the case um the where this works best is when you when you have a smaller group of creditors who are going to be impaired right if you've got hundreds and hundreds or thousands of creditors who are impaired and you need their votes kind of hard to solicit that and negotiate that without a automatic stay in the bankruptcy process hard to do that uh out of court um you still probably want an rsa uh in the early stages of this to try to get people um in your camp and as a borrower locked up if you will and vice versa to get the debtor except for the fiduciary out you know on your side on the deal uh because if you don't quite get into the full pre-pack you at least have a pre-negotiated deal and you can file and then implement it in the pre-negotiated uh type transaction um in the pre-packs they don't work in sales and they don't really work in an operational restructuring so if you need to shed a bunch of leases or really bad contracts or things like that pre-pack tends not to be um not to work it doesn't mean that you can't reject a lease or can't do some operational things in a pre-pack case but if your case is really about operationally using the bankruptcy code and rejecting agreements or selling certain assets and things like that prepack doesn't doesn't work that way there's too much notice and objection requirements and other things like that to that you need to work through the bankruptcy process through motions and hearings and so forth that you can't really uh wrap that up in a bow and just uh uh you know do that in a pre-pack uh the other thing that is an issue with the pre-back potentially which is why you want a small group of creditors if someone doesn't like what you're doing they may push you into involuntary in an unfavorable venue right if if you're not treating trade 100 they are not going to like a pre-pack they may they may sue you in a in a jurisdiction that might be more favorable to them uh you know you you think about the automotive cases right they all filed in new york you know if they were trying to do a pre-pack they could have had an involuntary in detroit you know they didn't want to be in detroit they wanted to be in new york um you know there there were only 100 people protesting the gm sale in new york there would have been tens of thousands of people protesting the gm sale in detroit so there's a reason why management and and the lenders i.e the government wanted to be in uh in new york so um to sum up when this makes most sense smaller groups and really small groups that are that are impaired uh so unsecureds tend to just ride through at 100 cents on the dollar and the bankruptcies are not issued for them let me ask a follow-up there on that as well um i have not seen a pre-pack where the trade creditors were impaired um it would be very difficult in most circumstances to line the trade creditors up in advance have you seen that are you aware of cases where they have had impaired trade creditors and still made a pre-pack work not on a pure pre-pack joe have you seen i don't i can't recall that because the problem is if the trade is unimpaired sorry if trade is impaired then as a class they get to vote even if you have another class that gets to vote and therefore you know you could cram or something like that they would still get to vote unless i guess you would say the fulcrum jet was like at a second lien you know or meslin or something like that debt level and that trade is getting wiped out and getting zero so they're not entitled to vote and deemed to reject but if you put that document out there in the public because you're soliciting your pre-pack votes and you're you're a trade lawyer and you realize you're going to get zero or not 100 cents you're going to start trying to disrupt that and you're going to end up in an involuntary scenario and that's why i have not seen it or i am aware of it i don't know joe if you if or peter if you know of that of a pre-pack in which there was impaired unsecured fair trade i would think that's a high risk of being an unsuccessful pre-pack like you said yeah yeah not that i've seen yep okay all right so uh let's talk about timetables because this is kind of an interesting thing with a uh a pre-pack so uh here we've put on a little chart that just gives you the regular timeline if you will of a bankruptcy case um and you know this is kind of the traditional free fall uh category that we that we showed uh and you know you have a filing a pre-petition filing prep preparation you know which can usually a couple months or a month on a normal operational case will give you enough time to kind of prepare the bankruptcy but it can be a lot a lot longer of course you know the the boy scouts for example you know retained sibley austin in october of 2018 and and filed you know in february of 20 um 2020 and i was about to say 2019 i'm getting my years mixed up 20. so over a year of pre-petition planning uh where they tried to do a pre-pack which failed and then have a regular case now which will which will you know will take a while um then you file day one in a traditional case and you have your first day h aring and and you have it you know you know stabilize the business both in the court and on the business side which will take you a couple months in that in that scenario uh to go uh you know to get that implemented and then you start negotiating which could have pre-petitioned with creditors and that can take you know who knows how long could it take you a little bit of time could take you a long time uh then once you have that business deal or you think you have a deal that the creditors can accept or enough creditors will accept you gotta file your plan and disclosure statement um you know you've got you have a deadline debtors have a deadline to file that which can get extended but there's a drop dead date of 18 months you know you can't get extended further than that um you usually need 28 days notice but you do a little bit more between the disclosure statement filing and plan filing and the disclosure statement hearing and then the second hearing after disclosure statement is approved then you um you know uh move forward to confirmation again 28 day notice but you tend to do a bit more than that so that's usually like we'd like to say about a three-month process in a normal case plans confirmed and then you exit bankruptcy so it's something on the quick side you know four months uh would probably be a quick chapter 11 traditional playing case and then on the long side who knows how long you know it could be uh much much uh much much longer so that's kind of your typical timetable with lots of caveats so it could be uh uh you know all all over the uh the place um so what happens uh in that regular timetable when you think about in in a pre-pack pure uh pre-packs next slide peter thanks uh so in the pre-pack uh a lot of those things in the timetable are actually done before you find bankruptcy the uh uh you know in terms of negotiating with the key creditors well a lot of times you're doing that in the bankruptcy case pre-pack you do it all before um you know you've you typically have confidentiality agreements because they're going to want you know these bondholders or or lenders are going to want certain financials and different things like that to kind of understand what the deal should be uh they'll have advisors typically in top of the debt advisors and so you're going to have ndas to get that those kind of uh that kind of information necessary for the due diligence and then you're gonna you know best practices would be to get an rsa executed uh as a template for the plan of disclosure statement you're going to then draft those documents finalize them solicit those documents to get votes have objection deadlines get voting deadlines get those deadlines in and then you file bankruptcy and then you move to confirmation and to exit bankruptcy so when you look in fact peter if you want to backtrack one one slide thank you so if you look at this timeline here where you've got the blue of the filing and the traditional one that blue day one bankruptcy filing is going to be all the way just right before confirmed plan right it's right before that confirmation hearing uh is where that that actual filing date happens so all these other boxes will be happening before so one thing that you've kind of uh seen and i think here is an example of a pre-pack that's um one more please peter thank you uh which was in the southern district is and and this was kind of their um um this is the from their pleading so we have to give them credit for a nice graph um of all these things in the blue that happened uh before they filed you know the blue being the uh the petition date you know and they they negotiated they um they had their um uh you know drafting and so forth and then on january 4 when the deal was done and all the documents were pretty much there boom they moved forward with with notice with solicitation with voting deadlines um you know with the plan supplements which all these ancillary documents that are part of a restructuring deal uh and and then you know including objection deadline uh to to the um uh to the plan and then they filed bankruptcy and then the next day they had a combined disclosure statement approval and confirmation hearing so they spent basically uh one day in bankruptcy and did all this stuff uh before and so that's what we kind of are calling the uh we've termed the ultra expedited pre-packs uh which are kind of a unique thing uh if you go to the next slide peter um it's you know you've gotta we've got a couple examples uh all you know where they literally are in bankruptcy um for day for week i mean these are extremely fast and fall beauty is great and we've got a little quote here in terms of the basis uh where the u.s trustee was arguing more notice you can't go this quickly and judge drain was basically saying you know where where does there need to be a compelling reason to have a very fast pre-pack and before the ust could even answer he he shot him shut him down and basically said you know it doesn't say it anywhere it's it's a false standard to require a compelling basis to have an expedited pre-pack and that there's no reason you can't have a pre-pack uh file bankruptcy on day one and and be out of bankruptcy on day two uh that is more of a new york thing i don't think that is a uh something that will happen nationwide i think there's lots of courts including delaware who might not allow a one day in bankruptcy now who kind of maybe feel like a little bit more notice in the bankruptcy process would be appropriate uh and i think some of those courts would argue you know what's the true harm of waiting you know 30 days between filing and confirmation hearing in the traditional pre-pack timeline versus this one or two or five days in the ultra expedited pre-pack uh fact pattern and you know you could argue the business you could argue something but i'm not sure uh uh i'm not sure that um that that carries weight because the business is always crumbling in every bankruptcy case and the reality is it's not always true although you know in some cases uh it is um so let me uh then pass the uh virtual podium here uh to my partner joe who's going to get a little bit more into nuts and bolts of the uh pre-pack requirements uh having you know me having set up kind of a 30 000 foot uh uh uh intro joe take it away let me press on mute thanks eric i appreciate it uh so i'm going to get a little more uh down to the bottom grass level uh fine details about uh how to get how to do pre-pack it's not extremely difficult uh once you follow the rules um there are not a lot of rules governing pre-packaged bankruptcies a few code provisions few bankruptcy rules and it's primarily relying on the chapter 11 rules and this is ironic because the history of pre-packaged bankruptcies goes back you know to the middle of 19th century but the first enactment occurred in 1978 with with the passage of the code uh still not a lot of rules uh next slide please peter um eric talked a lot about restructuring support agreements i'm not gonna touch on it too much um it's just it's the key path to getting towards a uh a pre-packaged plan uh you've got the key commitments but an rsa is not a light document it generally tries to bind a debtor to certain key documents like a plan and disclosure statement uh you know funding documents pertinent court orders and it usually includes milestones which says okay in 30 10 days you have to do this in 20 days you have to do that in 30 days you have to do that and it does that so that it can obtain some certainty over the process a lot of rsas look like a plan planning disclosure statement so they have to you know add that caveat in addition to the fiduciary out that eric talked about that this is not a plan and disclosure statement because the bankruptcy code says that there are certain ways that you have to uh ask creditors to vote in a plan if you don't do it those ways uh then their acceptances are not counted uh next slide please peter one thing of a pre-package as i mentioned before is that it has to meet the same chapter 11 requirements as a regular chapter 11 case like a free fall case so in chapter 11 11 29 governs the plan confirmation requirements there are 16 broad requirements um one of them is really comprehensive which says you have to meet the other provisions of the code so that drags and ties in the other provisions which are enormous but there are 16 uh generally but pre-packs are primarily the unique concept of pre-packs is is the voting that occurs prior to bankruptcy it addresses all that voting prior to bankruptcy next slide please peter the other concept is part of voting or the central part of voting is a disclosure statement that's how you ask people to vote uh it's this large document that describes a plan describes the history of the debtors it tells you how the debtor's gotten to bankruptcy it gives you evaluation of the debtors once they exit bankruptcy uh it demonstrates how the plan meets the best interest of creditors through a liquidation analysis which compares the recovery in chapter 11 versus recovery in chapter 7. it gives you projected financial information to show that the plan is feasible and the debtor won't have to file bankruptcy again um and it goes through all the solicitation procedures how they're going to vote who's going to vote who's impaired who's not impaired tax consequences of the plan and the risk factors and then it asks you to vote for the plan next slide please peter um so on solicitation and voting you know you have to include generally three things the disclosure statement the plan and the balance there may be one or two more things like a letter from a creditors committee or from plan proponent that says uh please vote for the plan we think it's the best interest there's also the concept of record date which is hugely important with public debt public debt could trade millions of times over on a daily basis so the bankruptcy code requires you to establish a date where you're gonna uh record the people that are actually gonna vote on the plan um that is included in part of the disclosure statement you have to establish that date and you generally it's close to the time you file bankruptcy because you don't want to get uh people that weren't impaired or not really impaired by the plan to vote on the plan um now when i before when i mentioned that there are very few provisions governing pre-packs the the ones in red over here on the slide are really the provisions that are governing pre-packs 1125 says you can start uh soliciting people prior to bankruptcy like i said this concept came out of equity receiverships back in the 40s where they did it prior to actually initiating a proceeding uh there's 1126b that says that uh if the acceptance uh occurred prior to bankruptcy uh if you if it complied with applicable non-bankruptcy law uh and what that means is uh is state public securities laws or the securities acts of 1933-34 that the uh the disclosure statement will be fine the acceptances will be deemed acceptable to the court and you can confirm a plan bankruptcy rule 3018 also says that we're not uh you're not going to allow acceptances to be to support a plan if you don't have record holders that are voting on it and if you're not giving it disseminating the plan and the solicitation package to all creditors of the same class and if the voting period is too short or the disclosure's inadequate there's another rule 1121a that says you can file a plan um uh on the same day of confirmation on the same day you file uh your bankruptcy your petition uh and that's also part and parcel of the pre-pack that's what happens you essentially file plan and disclosure statement but you did all the voting and everything prior to filing bankruptcy but you file all of that with the court the same day you file bankruptcy next slide go joe can i can i stop and ask you a question here um on the 11 b question the the statute says you have to up comply with not applicable non-bankruptcy law um if you are dealing with claims that would not otherwise constitute securities for purposes of the securities laws do you still have to comply with the securities laws or does a different rule apply under those circumstances that's a great question it's mostly for the securities laws that are are not exempt under the securities act uh so a lot of times you have publicly traded debt that has an exemption under 4am the 1933 act and you don't have to comply with uh securities laws so a regular trade claimant you don't have to comply with uh securities laws what happens there is you comply with section 1125 which is sort of modeled after securities laws but not as complicated and says you have to provide uh the creditors with adequate information but it's not as as comprehensive as the securities laws and that and that same um situation would come up with um with bank creditors um whether traditional bank creditors or whether you're looking at one of these newfangled bank debt packages where the actual creditors can be funds an insurance companies and anybody else who can squeeze together about 2 million bucks to buy a piece of it so i mean there are a lot of circumstances including the ones i've been involved with where there there was no need to solicit under the securities laws because um the outstanding debt was not securities and the outstanding equity was either was not voting either because in one case it was being passed through and in another case it was being wiped out and you also have good securities lawyers tom um next slide i'm not worried about having the right tools here at dorsey but which ones have to be applied is the question yeah the uh well i i rely on my securities lawyers whenever i have come up with these situations besides the disclosure requirements of adequate information and the plan you have notice bankruptcy is a lot about notice and there's a quintessential notice deadline which is 28 days in a regular free fall bankruptcy you have 28 days for a disclosure statement here you have to give uh all creditors 28 days to object to the disclosure statement and notice of the hearing and then another 28 days for plan confirmation so that's how you get to eric's timetable of 60 days 60 to 90 days to confirm a plan um those 28 days are essential uh what what ends up happening is you end up collapsing that and you just give uh parties 28 days in a pre-pack case you get parties 28 days for the plan and disclosure statement hearing and uh and objection deadlines and you do that after you file the bankruptcy um you also give the u.s trustee uh all the rules require the usrc uh have knowledge of the disclosure statement the plan and objections and if you're doing injunctions that are not permitted by the bankruptcy code sometimes there's third party releases that are included in a plan uh you have to include specific language and that's part of the noticing requirements next slide please peter uh court approval is always essential joe let me just jump in i was going to say on the noticing piece and so that's kind of i think why some of these cases courts uh delaware and others are going to say let's let's have a month here in and out of this case while new york saying look i'm going to shorten that time for that 28 days because you know why not like you gave everyone plenty of time to object pre-petition anyone who has an issue should have done something and you know why wait 28 days what's the point and it's a little bit more you know who you're thinking about the pro debtor side or the pro creditor side and i think new york's being a little bit more pro debt or pro plan supporters well delaware's being a little bit more like the person we haven't heard from yet let's let's give them a little time to raise an objection new york is i mean you're right eric new york is a a unique venue because it's had special laws governing pre-pack since 1999 um and uh you know so it's it's a leg up before everyone else and those laws are very elaborate i'm gonna talk about those in a second um and it's sort of like someone sat down and thought about okay how do i employ all this most of the jurisdictions don't have that although delaware and you're familiar with this because you're in practice a lot i delaware um are very familiar with pre-packs that they they kind of fit them within their local rules um i know for the southern district of texas which was closer to home for me there's maybe you know a couple of specific rules and the complex rules that govern pre-packs but new york has a a very extensive rule and that's how you get a 24-hour bankruptcy ultra pre-pack um court approval is essential for everything the only the biggest thing i'll tell you here are that you get court approval after you file the bankruptcy normally you first say mother may i and then you file the bankruptcy i mean before you get a disclosure statement hearing or before you get a planned confirmation hearing uh but with the pre-pack situation you tend to try to do everything correctly uh predict what the court would do and then on the first day you asked the court for permission uh that blesses everything that you did um next slide please peter publication notice is also very important as we talked about public securities uh you know a lot of times public securities are are owned in a trade name they're not owned by the actual owner um and that's for a lot of reasons uh the owners don't want to disclose what kind of securities they own um so how do we get notice the 28 day notice that bankruptcy code absolutely requires for a disclosure statement hearing and a plan hearing well um rule 2002 l says that you can do publication notice and publication notice um essentially looks like this i'm not kidding the fonts are not very much bigger these are a couple of cases we've been involved in but you put that in a newspaper that often investors look at for example denver was the houston chronicle in the i think new york times you know full brands i think was wall street journal and some other popular investor publication um but it ends up giving you that type of notice and unless you're uh understand where to look or you're often a sophisticated investor you're just gonna skip over this notice um but uh bankruptcy courts have taken into consideration the practicalities of having to serve hundred thousands of claimants hundred thousands of interest holders and this is the best thing to come up with to try to comply with due process next slide please peter uh like i said new york has very elaborate procedures uh they go down partial pre-packs they go down what happens if they file bankruptcy uh while i'm trying to do a pre-pack uh how to do a scheduling motion on the first day you know what happens what what the acceptable voting deadlines are 21 days for publicly traded securities um uh you know 14 days for non-publicly traded securities which is what tom was talking about uh 21 days you know for everyone else uh it tells you when to coordinate with the us trustee uh but but in practicality if you're going to do a pre-pack you're going to coordinate with the us trustee a lot sooner than three days that the local rules require you to because uh you need them on board you don't want anyone objecting you want to make everyone happy uh prior to filing bankruptcy and next slide people here um the other thing i would say about pre-packs downside of them is that there's a lot of protections that are uh waived when you do pre-pack now if you're the borrower's council or debtor's council you think it's great you get it done it's cheaper but if you're creditors you're thinking okay well i don't get the question better why he did this why they did that and why they did that and i think the rationale is that you've gotten their vote or most of their votes you're leaving them unimpaired so they shouldn't be able to complain but i think it's a detriment to some parties because that invariably you're not going to get a 100 percent of the parties happy about the plan variably there's going to be some parties that are not fully satisfied in terms of all their rights um and i think the other disadvantage is a lot of jurisdictions just don't have local rules like the southern district uh to to kind of give people parties an advanced notice of what's acceptable in terms of due process notice and voting and things of that nature um so uh all in all pre-facts are great uh i don't want to say that wrong but uh if if you're a dissenting uh creditor uh going to waive these protections during that process next slide piece peter all right we're um i'm going to take a break here and uh go through some questions and i know that the answers have been provided already by other others on the panel but they were only provided to uh the limited universe of the person who asked the question and the other panelists so let me just uh go through these uh there's four of them the first one have any dtc record holders been held liable for not passing notice on to the beneficial holders and this would be notice of the uh filing of the plan the plan and the disclosure statement and eric you want to uh respond to that i'm not aware so i guess the issue is you know there's a solicitation process and you know dtc which is it is supposed to issue out these notices to the the beneficial holders who are holding it you know a street name and um and they don't pass it along or they don't pass it along in time i think it is probably the more likely scenario i'm not aware of liability on uh i mean i don't think it's really that much of a borrower problem because i think the publication notice is the backstop for adequate notice having been given so if some holder down the road shows up and says i didn't get actual notice because my agent didn't send it to me appropriately my broker um i think the court be like well there was publication notice so you know if you were paying attention you would have known and um but i'm not aware of of of that uh uh that dtc problem i don't know with anyone you know peter or joe whether you've you've seen that and steve heim i don't know whether you've seen that uh i guess you're asking so you probably haven't so um yeah go ahead tom all right the next question is um if a bank is the only secured creditor and there are only a handful of unsecured creditors is this meaning the pre-pack a good option well and let me this actually is going to answer i think one of the other questions that was sent to us which was um you know can you get everyone to forbear during the negotiation process in the pre-pack and and the answer is usually yes and and this is one of the examples where you have one lender who's really involved in the pre-pack and no one else is and or you have a you know a group of bondholders who represent 90 of all the debt and those 10 bondholders are all represented by one ad hoc committee and one law firm right and and and why why would they all band together or why would this you know one creditor agree to forebear uh and negotiate because at the end of the day they're going to be bankrupt anyway potentially or it's out of court and it's most efficient for them since they're the biggest stakeholder to do this efficiently and less costly so why not sit down and forebear and have a conversation and see if you can work it out uh in a cost-effective manner if you can't all right fine then we'll file bankruptcy and we'll have a little bit of a fight about it uh but if you can do it this way uh then let's do it this way it's just kind of like litigation right before you sue you might want to have a conversation and enter a toning agreement to see whether you can resolve the issue because that's better for everybody uh you know plaintiff and defendant if you can't then you move forward and that's i think the way these these things a lot of times work and that's certainly consistent with my experience to the major creditor uh groups the ones who are participating in the negotiations will forbear prior to the bankruptcy and i joe i think you're you you said in your answer that that's your experience as well i i completely agree and i mean i probably answered in a way that said like a formal forbearance agreement you really only obtain that from a bank or uh you your major constituents you don't try to obtain that from uh smaller creditors there's just too many out there and uh everyone wants the last piece of the pie so um but they're gonna forebear in terms of not taking you know initiating a lawsuit especially if you can convince them well look if the bank wanted to could take everything away and um and you'd be left with nothing so i think it serves your interest to try to play with everybody that's a good point joe because i think the forbearance for a bank that especially you know you have an account control agreement you you you're holding the the borrowers the debtor's cash you want that forbearance because the bank if you're in default can just sweep and the company instantly if you're if you're a bondholder you know unsecured bondholder what have you yeah you're going to file a lawsuit and then the company will answer or move to dismiss i mean you can't the company in a nanosecond so you don't you don't really need the borrower is not going to need a formal forbearance from that group because it's going to take them so long to actually cause real chaos for the company so um you know it's almost like a handshake all right we won't sue you and sometimes they sue in the middle of those negotiations to try to push some pressure and maybe that causes a filing who knows a million different options let's go forward with the case studies here first one is the pennsylvania real estate investment trust or preet which is um a case that i'm working on right now and i had thought that it would have emerged from bankruptcy uh by the time we had this uh presentation and i turned out to be wrong so i'm going to talk a little bit about this case but only things that are of the public in the public record because of the fact that the case is still ongoing pennsylvania real estate investment trust is a as the name uh indicates it's a reit it's a mall reit so it owns a lot of properties that are underperforming right now um and the the um the the company negotiated with its principal creditors um to you know come up with a plan traditional pre-pack in this case it was a little different than than most pre-packs in that it wasn't really a balance sheet restructuring per se equity passed through the case um and what happened in the case is that the uh the bank lenders agreed to give uh give period a little bit more time and a little bit looser covenants going forward and the opportunity to uh take another shot at turning the business around in exchange for taking collateral so what the um what the creditors were getting out of this was not any kind of payment but they were getting essentially a lien on all the company's assets to secure the bank debt um but as a a mall read uh peri also had some some property level uh funding at a couple of their um a couple of their malls one was a joint venture and one was uh they were the sole owner but those were not brought into the bankruptcy case and um those needed to be restructured at the same time as the corporate debt and that had to take place outside of the bankruptcy and uh turned out to be much more of an effort i think than than what they had um assumed and i guess the lesson from that aspect of the case is if you're gonna do a pre-pack make sure you got everything in the package if you don't have everything in the package it's not necessarily going to work this was also a case where where you use the pre-pack because you don't have unanimous consent from all of the parties if all of the lenders had signed up to do the restructuring it could have been done out of court because the equity wasn't being affected the trade wasn't being affected the only people who were being affected were the lenders and um in this case they got 90 of the lenders to sign up for an rsa but not a hundred and that meant the case had to be done through bankruptcy because you got dissenting creditors they ultimately ended up getting a hundred percent approval for the plan by the time of the confirmation hearing but at the time of the filing they didn't have that so that's another way that a pre-pack is a valuable tool if you have a strong majority but not unanimity for a plan that extends maturity or otherwise would require a 100 percent vote under the relevant documents the the final piece about p reit which is interesting and and shows that there can be disadvantages as well as advantages to this is that the way that that that the p reit decided to treat the guarantee claims which was the claims of the mall level um lenders uh that had you know payment guarantees of some at some level from from p read is they let them pass through the bankruptcy unimpaired and that for that reason they were able to treat that class as unimpaired and not entitled to vote but in fact what the plan did is it gave all the collateral to the bank creditors who had been perry pesu with those guarantee claimants and are now going to be senior um under the plan so the uh guarantee we didn't have any fight from any of the guarantee claimants but the fact of the matter is they could have come in and argued that they weren't being treated the same way as other unsecureds who were at the same level and therefore it could have gone differently if the if those guarantee claims had not guaranteed claimants had not decided to allow it to go through so that that those are the lessons that i take out of the p-reit case pace industries is another case that i was involved in another delaware case glad to have delaware cases or texas cases because like i have a real bankruptcy lawyer to help me with them hey tom yeah i hate to jump in can we let's skip to uh peter's case study because we're running a little bit low in time that's a good point i want to go ahead and do that not that pace isn't interesting but thanks guys um yeah so i'm going to talk a little bit about um carlson travel um for those local in minnesota you you certainly know carlson and its uh primary operating uh subsidiary carlson wagonlit travel they are a global uh travel agency they in addition to doing corporate travel they do events they do conferences they do exhibitions they do large-scale um travel and entertainment so as you can imagine uh covet did not work out well for them and and it severely impacted their business and and as was the case with the travel um industry it happened almost you know overnight and it put the carlson global travel empire into a real difficult position very quickly they realized almost immediately as did their primary lenders that there was going to be a serious issue beginning around the summer with covenant compliance they had they had three major classes of debt they had a fully secured commercial bank credit facility as well as um senior secured notes that were both euro and u.s dollar denominated and then they had um unsecured notes and you know i think they they began lobbying efforts right out of the gates to work with their lenders to figure out how to best manage the process carlson is privately held company and actually dorsey in this case represented carlson inc which is a it's a privately held company that you know that ultimately was 100 owner of the travel business um amongst uh they've got a number of other uh investment activities as well and so carlson travel as well as carlson inc worked together with creditors to figure out what they could do to try and facilitate an out-of-court restructuring the original goal was to keep the business running and to try and avoid any disruptions they were in the midst as they constantly are of negotiating long-term contracts with providers and with all the uncertainty in the travel business generally it was a it was a time when they really wanted to avoid um being in bankruptcy and giving their competitors any sort of competitive edge while they were um you know seen as being vulnerable so um you know after some some long negotiations including waiting to see if the government was going to come up with funding similar to what they provided to airlines when it was clear that that funding wasn't going to be forthcoming they they roadmap pretty much exactly what eric and joe have previewed for us they had an extensive and very detailed term sheet with the negotiated usiness deal which involved um the owner carlson inc putting in 125 million of new equity it involved existing bondholders signing up to purchase 125 million in new new money notes it had the secured creditors the commercial banks agreeing to allow all of these changes and the incurrence of new debt to happen and it wrapped all of those you know pretty complicated terms with a lot of tax structuring on top of that into a very thorough detailed and uh hefty rsa the rsa negotiations um because of the level of detail of the transaction because of the tax implications on both the company as well as the parent company um you know it it really you know sort of made for an interesting rsa negotiation process um but you know when you narrowed it down similar to what was being discussed about you know making sure you've got the right number of creditors at the end of the day there were about 12 bondholders that had about 85 percent of the debt um they held them in multiple funds which is pretty typical but you know that you were really dealing with about 12 entities um they were the ad hoc committee they were also the backstop committee because they were the ones agreeing to buy the new notes um and so you know there was a backstop agreement that was put in place to ensure that there was uh enough support to actually you know purchase all the new notes that need to be purchased there was an equity contribution agreement that was put in place that was there to ensure that the 125 million went in there was a whole negotiation on a shareholders agreement because a new entity was set up in between carlson inc and carlson travel to ensure that um that the um the new money notes purchasers would get equity in the new entity which was part of the business deal adding to all the complications that um joe and eric talked about earlier in the tom address with his question of what about the securities issues this is a privately held company that was now issuing securities um you know under uh security under registration exemptions but you know we we had to manage through that process um the solicitation process for the consent um for the exchange um because all of the existing notes were being restructured pretty much textbook everything that these guys laid out needed to happen happened at the end of the day the consent solicitation was launched the offering memo and the offering was launched for the new equity and the new debt and then we sat and we waited and the company was very eager to keep this out of bankruptcy um but you know in the event that needed to go in there were really two drivers for what could have caused that driver number one was what tom talked about which was could they get all of the consents required they were pretty sure they could but that wouldn't be known until the end of the solicitation period and issue number two which was an interesting issue that i think has become very prevalent this year given the rapid decrease in business for so many businesses due to covid is what's the cancellation of indebtedness tax analysis and one benefit that an owner of a business that receives a significant modification to its debt and might otherwise incur tax liabilities on that forgiveness of indebtedness if it is treated as such can do is they can rely on an insolvency exception and one way to prove up that insolvency and such exception is to run through the prepackaged bankruptcy so those were on the outside but at the end of the day there was enough uh force and enough consent and enough interest in the new product that was being sold um through the consensus station and the offering memo that they were able to pull this off out of court but the pre-pack and all the planned documents were included as part of the consensus station as well as in the rsa so it was fully negotiated it was outlined just the way it was described in this presentation unfortunately for the company it was not needed so i know we're running low on time but tom one question peter yeah please joe um in your experience this seems like the typical case where uh you're trying to do a workout at the same time you're it's like parallel paths correct and the uh and the pre-pack yeah it very much was and and you know it i'd say there were probably about three months of workout negotiations and it was all it happened so quickly and coveted impacted this business so dramatically that the covenant compliance issues didn't even come up till you know but they knew what was coming they saw the cliff and and they were very proactive in trying to maintain and preserve partly because it is such a strong relationship business they just they they really needed to protect their um their place in the market um and so it was absolutely though a workout and a pre-pack and a you know rsa negotiation were all happening simultaneously all while waiting for government money that never came and you know that's a lot like p reit i mean p read had literally an rsa with two term sheets one for an in court and one for an out of court restructuring and peter were they able to get a hundred percent is that why they were able to do this without a bankruptcy they didn't need a hundred percent of the bondholders but they got over 95 percent of all three classes of bonds they did need a hundred percent of the credit agreement lenders and they got that although that was a very um because it was an international deal that needed to close in london before it closed in the u.s it was uh it it made for some very late nights slash early mornings to get the closing and get those final consents in and people definitely waited to the very end all right we are um two minutes over i don't know if folks want to stay on hear about the other two case studies or not um if you don't want to thanks for joining us and feel free to exit now i will quickly cover pace and then let joe cover denmary for those who want to stay um pace was a classic pre-pack um it was a balance sheet restructuring debt converted to equity you had a senior uh revolving line secured by the current assets that passed through the bankruptcy they had that put some more money in so they had to vote for it but the bottom line is that that that isn't where the action was you had um term lenders who had uh some fixed assets and junior position on the current assets they uh got some uh senior term debt and they got some uh equity in the transaction uh original equity was wiped out that's also not an unusual set of circumstances what was unusual in pace is that you had common equity which was willing to go along with the plan that wiped them out because they got some other things they wanted out of it and then you had a preferred shareholder who did not want to go along and that preferred shareholder under the certificate of incorporation had a blocking right bankruptcy couldn't be filed without their consent per the certificate of incorporation the board decided to file bankruptcy anyway and the preferred shareholder objected and the big issue in the case turned out to be that um preferred shareholders right to uh to block a bankruptcy filing the bankruptcy court ruled for the debtor ruled that the preferred shareholder um i mean it wasn't 100 clear what the ruling was but it was either the preferred shareholder had a fiduciary duty to all of the parties which it had not honored or there was a public policy problem with letting a a blocking position be in the hands of one um one party in interest who did not have a fiduciary duty um very interesting case um not so much from the pre-pack perspective but from the perspective of that issue coming up and and being decided um by by the delaware bankruptcy court in a manner i at least didn't expect it to be decided and i think one thing just to add to that case it was a bench ruling after a long hearing so you know a little um a little different than a a more carefully crafted right opinion which is hence tom's uh analysis of not sure what the actual ruling was is well if you read the transcript it's a little confusing about whether it was it a or b or a combination of the two but such as bankruptcy i i'm going to quickly go through denbury it's an exploration production company i'm sure we've seen a lot of those lately uh it was a pre-pack partial pre-pack and i'll explain what that means but it's a classic case of balance sheet restructuring uh where you took about two billion dollars in debt and you converted into equity and the company comes out of bankruptcy you know two billion dollars leaner um so they uh they got out of bankruptcy in 35 days um but the unique aspect of it the partial pre-packed aspect of it is not everyone voted prior to bankruptcy uh because of these securities issues they were going to have to get the equity to vote on it um and uh it's also and so they wanted to avoid securities issues well under when you file bankruptcy section 1145 exempts you from securities issues and puts you back into the realm of section 1125 which says all you need is adequate information and a disclosure statement uh and that's all you need to allow people to vote um so they elected to solicit uh all of the unsecured bond debt prior to bankruptcy which is again exceeded 2 billion they felt within an exemption even though they were publicly traded so they didn't have to comply with sec laws and then as soon as they filed bankruptcy they asked the court to solicit the equity holders and uh they did so and and still were able to leave bankruptcy pretty quickly um so a good good example of a balance sheet restructuring uh consolidates everything that i mean what eric started with it's uh you need it you need several groups here that uh uh concentrated groups that can vote uh quickly um you leave one class like the trade creditors that are divergent unimpaired so they can't complain that means they don't have to vote you don't have to ask them for permission and when you file bankruptcy you're almost ready to go so interesting case and a good example of balance sheet restructuring thank you everyone for joining us today and uh we will we will be having another round table in january uh we're getting that topic together now look forward to seeing everyone in the new year and at some point in the new year in person thanks very much